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JPMorgan trading loss draws scrutiny

Published:Sunday | May 13, 2012 | 12:00 AM

A surprise US$2-billion trading loss in a six-week period by a division of JPMorgan Chase triggered calls on Friday for tougher regulation of banks three years after their near-death experience in the financial crisis.

The bank's stock lost eight per cent of its value in minutes on Wall Street Friday, and other American and British banks suffered heavy losses as well.

JPMorgan Chase said last Thursday that it lost the money in a trading group designed to manage the risks that it takes with its own money.

CEO Jamie Dimon said the bank's strategy was "egregious" and poorly monitored.

no customers suffered

In a letter sent to employees late Thursday that was obtained by The Associated Press, Dimon says no customers suffered as a result of the bank's mistakes.

"The argument that financial institutions do not need the new rules to help them avoid the irresponsible actions that led to the crisis of 2008 is at least US$2 billion harder to make today," said Rep Barney Frank, D-Mass.

Frank, the retiring Democratic leader of the House Financial Services Committee, said in a statement that the revelation runs counter to JPMorgan's narrative "blaming excessive regulation for the woes of financial institutions."

Dimon has been among Wall Street's most outspoken critics of efforts to regulate the financial industry more heavily.

Cliff Rossi, a former top risk executive for Citigroup, Countrywide and other big financial companies, said he drew little hope from the steps Washington has taken.

He said JPMorgan's loss shows that the market for the complex financial instruments known as derivatives is too opaque.

"This is actually worse than Citigroup landing in trouble" in 2008, Rossi said, "because JPMorgan is recognised as one of the better-run institutions."

The head of the US Securities and Exchange Commission, Mary Schapiro, told reporters that the agency was focused on the JPMorgan loss but declined to comment further.

proprietary trading

The bank appeared to have been betting for its own benefit, a practice known as "proprietary trading", said Rossi and other former bank executives.

Dimon said the type of trading that led to the US$2-billion loss would not be banned by the so-called Volcker rule, which is still being written and is expected to ban certain types of trading by banks with their own money.

The US Federal Reserve said last month that it would begin enforcing that rule in July 2014.

Bank executives, including Dimon, have argued for weaker rules and broader exemptions.

On Friday, bank stocks were hammered in Britain and the United States, partly because of fear that the JPMorgan loss would lead to tougher regulation of financial institutions.

"The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought," Dimon told reporters last Thursday. "There were many errors, sloppiness and bad judgement."

- AP